How will savings in a life insurance plan help reduce my tax liability?

30th December 2014
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Your savings in Life Insurance not only provide protection to you and your family; they also help you reduce your tax liability.

Tax Slabs
This explains how the various tax brackets work and how much tax relief we are all eligible for. The new tax structure was initiated on 1st April 2014.

The present tax structure is as follows:

Tax slabs for Financial Year 2014-2015 (Assessment Year 2015-2016)

Surcharge on Income Tax:
From Financial Year 2013-14, Surcharge is applicable @ 10% on tax payable in case of an individual if total income exceeds Rs.1 Crore

Education Cess & Secondary & Higher Education Cess on Income Tax
Education Cess @ 2% & Secondary & Higher Education cess @ 1% will be payable on the amount of income tax.

Service Tax
All premiums and charges are subject to applicable taxes including service tax, education cess and secondary & higher education cess as applicable under the prevailing tax laws. With effect from April 1, 2012, Service Tax Rate has been changed to 3.09% on first year premium and 1.545% on subsequent year premium for traditional endowment & annuityA contract sold by a life insurance company that provides fixed or variable payments to a recipient, either immediately or at a future date. products and 12.36% for ULIP, Term, Health products & Riders. In case of surrender of policies, service tax is charged at 12.36%.

Life insurance policies can be useful tax planning tools, because the policy holder is eligible for tax benefits under the Income Tax Act 1961 (Act). Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instruments. Plans from Bajaj Allianz Life Insurance can be used for protection, long term savings and tax planning. There are two kinds of income tax benefits available to individuals with respect to long term savings being made in Life Insurance policies:

✓ Deductions u/s 80C/80CCC:

  • Benefit is available to Individual assessee and Hindu Undivided Family assessee.
    o    In case of individual assessee – Himself/herself, spouse, children of such individual
    o    In case of HUF assessee – any member of HUF
  • If the amount of premium paid in a financial year for a policy is in excess of 20% of the actual capital sum assured, then deduction will be allowed only for premiums up to 20% of the sum assured.
  • For insurance policies issued on or after April 01 2012, deduction is allowed for only so much of the premium payable as does not exceed 10% of the actual capital sum assured. (15% of actual capital sum assured in case of person with severe disability or specified ailment).
  • Above benefits shall be reversed if the policy is terminated/cease to be in force within 2 years for traditional products and 5 years for ULIP products after the date of commencement of policy.
  • Sec 80CCE – Maximum amount of deduction that an assessee can claimNotification to an insurance company that payment of an amount is due under the terms of the policy. under Sections 80C, 80CCC will be limited to Rs.150,000.

✓ Deductions u/s 80D

  • Benefit is available to Individual assessee and Hindu Undivided Family assessee.
  • In case of individual assessee – Himself/herself, spouse, dependent children and parents of such individual
  • In case of HUF assessee – any member of HUF
  • The qualifying amounts under Section 80D for self, spouse and dependent children is upto Rs. 15,000/- and additional deduction upto Rs. 15,000/- for the parents. However, a higher amount of upto Rs. 20,000/- is permitted for parents, if they are senior citizens. Assessee is allowed to make any payment on account of preventive health checkups upto Rs. 5,000 within prescribed overall limit.
  • 80DD: Premiums paid for disabled dependent are eligible for deduction up to Rs. 50,000 every year. A higher deduction of Rs. 75,000 shall be allowed, where such dependent is a person with severe disability.

✓ Exemptions:

  • 10 (10D): Any sum received under a life insurance policy, including the sum allocated by way of bonus. Dividends paid to shareholders from funds created out of additional profits realised by the company. on such policy will be exempt from tax. However, this rule does not apply to following amounts:
  • Sum received under Section 80DD(3), or
  • A sum received under a Keyman Insurance Policy, or
  • Any sum received other than as death benefit under an insurance policy which has been issued on or after April 1 2003 and if the premium payable in any of the years during the term of the policy does not exceed 20% of the sum assured. For insurance policies issued on or after April 01 2012, exemption would be available for policies where the premium payable for any of the years during the term of the policy does not exceed 10% of the actual capital sum assured. (For policies issued on or after 01 April 2013, 15% of actual capital sum assured in case of person with severe disability or specified ailment).

Illustration of Tax Savings possible is as under:
* Calculations are based on highest tax benefits.
** These calculations are illustrative and based on our understanding of current tax legislation.

Disclaimers

  • The above are extracts from the Income Tax Act’1961. Please note that tax laws are subject to change and hence before placing reliance on the above, the latest version of the above section should be checked. It should also be noted that the change in tax laws could have retrospective effect also.
  • This information should not be construed as expert tax, legal or investment opinion from Bajaj Allianz Life Insurance Company Limited. Bajaj Allianz Life Insurance Company Limited would not be responsible in any manner for decisions made on the basis of above information.
  • Please consult your tax advisor for claiming tax benefits on insurance products.
  • Sec 194DA of Income Tax Act 1961 provides for deducting tax (TDS) on policyholders payout under life insurance policy w.e.f. 01 Oct 2014. TDS if applicable will be deducted at 2% if valid PAN is available. In case valid PAN is not available, rate of TDS would be 20%.

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